JPMAM ’ s Malcolm : Bad news has already been factored into markets
Edward Malcolm , head of UK ETF distribution at JPMAM , speaks to Tom Eckett , editor at ETF Stream , about the key takeaways from the survey results and the firm ’ s market outlook for 2023
What are your key takeaways from these survey results ?
The survey revealed that the direction of travel for markets is pretty muted . This is no surprise given the year we have had with high inflation , geopolitical tensions and heightened volatility .
For me three things were interesting to see . Firstly , the massive shift in allocation to ESG strategies that we have seen in recent years might start to decelerate . Of course , ESG and sustainable investing is still a highly relevant topic . But 60 % of investors said that they would not allocate more , or maintain their position , to ESG ETFs . While more than 40 % of ETF investors still think 2023 will be the ‘ year of ESG ’, more than 50 % do not agree or are unsure – only 8 % anticipated allocating significantly more towards ESG ETFs in the next year . Having enjoyed 60 % of the inflows this year , it will be interesting to see how investors allocate in 2023 .
Secondly , the survey also revealed that investors are still cautious on emerging markets . With regards to China , over 60 % said that they do not expect their allocation to China to grow next year . The same can be said for broader EM investments . Respondents clearly showed that they see more opportunities in developed markets over EM . We think valuations in EM look very compelling , well below their longterm average since 1990 . This could be an attractive entry point if the macro picture looks more promising and investors can select strategies carefully .
And , thirdly , there seems to be a positive sentiment around active management for the year ahead . Some 57 % of respondents agree that 2023 will be the year of active and only 23 % disagree . We tend to agree with this , because with the end of free money , greater two-way risk in inflation and policy and increased return dispersions across assets , it gives active managers more opportunity to add value . Therefore , this could be a good time for investors to look at active ETFs , which combine the benefits of the ETF wrapper with the opportunities of active management .
It seems investors are relatively sanguine on the outlook for 2023 and concerned about an incoming recession . Do you share these sentiments internally ?
We believe that a lot of the bad news for 2023 has been factored into markets , with a moderate recession already priced in . Our base case for 2023 should ultimately be positive for stocks , with moderating inflation allowing the central banks to pause rate hikes and resulting in a relatively mild downturn . Yet with still significant uncertainty around how quickly inflation will improve , further challenges remain likely ahead .
Across fixed income , this year ’ s sell-off has created opportunities
Chapter 1 : Survey results
across the board . In recent times , bonds have provided neither of the two characteristics that they should – income and diversification . Both aspects are now much improved .
For 2023 , all eyes will be on inflation moderating . If inflation remains persistent around current levels , this could dampen our outlook . Fortunately , we believe there are already convincing signs that inflation is set to moderate . In which case , both stocks and bonds look increasingly attractive . We are more excited about bonds than we have been in over a decade .
How do you see the active ETF market developing in Europe over the next 12-18 months ?
We firmly believe that Europe will follow the US market and that active ETFs will gain more market share .
Some 32 % of survey respondents said they will increase their allocation to active ETFs in this timeframe while 10 % will increase an existing allocation but 22 % of the ETF buyers we asked stated they will start allocating to active ETFs for the first time .
Similar results have come out from other ETF surveys . For those investors that prefer the transparency and flexibility of the ETF wrapper but also want to achieve alpha , we firmly believe that active ETFs will play a role in the further growth and adoption of ETFs .
Edward Malcolm
Head of UK ETF distribution at JPMAM
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Chapter 4: ESG and Active
The ESG landscape
in Europe: Current
investment trends
Equities will continue to dominate ESG asset
allocation preferences over the next five years.
Over the same period, 40% of ESG investors expect
to increase allocations to China and emerging
markets. More than half of European professional
investors are expecting to use active ETFs over the
next five years.
E
SG continues to be the
dominant investment trend in
Europe, with ESG ETFs
accounting for 60% of all UCITS
ETF inflows year to date, as at 31
October according to Bloomberg.
Investors continue to rotate out of
traditional investment strategies
and into ESG ETFs regardless of
what is happening in markets. This
trend is very likely to continue,
according to the J.P. Morgan Asset
Management Future Focus survey,
which has recently been published.
The survey reveals that
professional investors in Europe
are exploring new avenues for
sustainable investing
opportunities. But asset allocation
drivers are changing, and so are
the ways investors are embracing
sustainability themes. To assess
and understand these evolving
dynamics, J.P. Morgan Asset
Management surveyed a range of
professional investors to
understand their future plans, the
challenges they are facing, and
their thoughts on where the most
compelling opportunities can
currently be found.
When looking at investors’ ESG
priorities, the findings showed that
environmental issues, and how to
address them through portfolio
decision-making, remained the
highest priority. However, this
traditional focus on the
environment appears to be
evolving, with investors
increasingly looking to prioritise
social issues as evidence of the
financial materiality of social
factors continues to accumulate.
When asked further about what
is driving asset allocation
decisions, the survey found that
client demand and aligning
investments with personal beliefs
were the most popular answers.
The third most cited reason was
end-clients wanting to make a
positive impact with a sense of
urgency. Importantly, more than a
quarter (27%) of the respondents
said they were driven by
potentially improved risk-adjusted
returns, while more than a fifth
(22%) also identified “accessing
companies that could create
long-term value” as an important
driver.
Chapter 4: ESG and Active
When it comes to regional
allocations, ESG investors are
looking further afield for future
opportunities. While ESG
allocations towards US equities
looks set to remain constant over
the next five years, respondents
say they are 7% less likely to find
opportunities in Europe (ex-UK).
The survey also made it clear
that emerging markets, including
China, may be expected to attract
the most interest from European
professional investors over the
coming years. The survey revealed
a seismic shift in portfolio
allocation towards emerging
markets, with 40% of respondents
showing interest in the area in five
years’ time (26% plan to allocate
over the next year).
We asked respondents how
they plan to use various
investment vehicles to access ESG
in the short term (over the next 12
months) versus the medium term
(the next five years). The survey
suggests that change is coming,
with 51% of respondents planning
to increase their use of active ETFs
to gain exposure to ESG
opportunities over the next five
years, compared to 43% over the
next year.exposure. However, with a
challenging outlook for equity
markets, investors also need the
opportunity to earn excess returns
as part of a diversified portfolio.
Passive ESG ETFs typically
apply exclusions or, if a sharper
ESG focus is required, they track
ESG indices such as socially
responsible, or Paris-aligned
benchmarks. By selecting a
passive ESG ETF, however,
investors are fully reliant on the
index providers’ ESG analysis,
which is necessarily based on
backwards-looking data. Unlike
ESG investing with active
ETFs
There is now a large offering of
indexed ESG ETFs available for
investors. Indexed ETF strategies
provide predictable, cost-effective
core solutions for investors looking
to build efficient broad market
51%
passive index investing, an active
approach allows for a more in-
depth assessment of ESG
characteristics, and for a more
forward-looking qualitative
judgement to be made. While
index trackers can exclude certain
categories and may seek to
influence companies through proxy
voting, our active investment
teams embed ESG considerations
throughout the investment process
and engage with companies to
create value, potentially enhancing
risk-adjusted returns over the long
term.
At J.P. Morgan Asset
Management, our active ESG ETFs
draw on the insight and in-house
data of our global research teams,
and leverage the scale and reach
of our investment stewardship
programme. We offer more than 15
ESG ETFs classified as Article 8 or
9 under the SFDR regulation. From
core building blocks with robust
ESG frameworks to targeted
thematic solutions, investors can
choose from a wide range of J.P.
Morgan ESG ETFs to express
sustainability preferences in their
portfolios.
Active J.P. Morgan AM ETFs
ETFInceptionTERAsset
ClassStrategySFDR
JPM Global Research Enhanced
Index Equity (ESG) UCITS ETF*, **10/10/20180.25%EquityActiveArticle 8
JPM US Research Enhanced
Index Equity (ESG) UCITS ETF*;**10/10/20180.20%EquityActiveArticle 8
JPM Europe Research Enhanced
Index Equity (ESG) UCITS ETF*, **10/10/20180.25%EquityActiveArticle 8
JPM Global Emerging Markets
Research Enhanced Index Equity
(ESG) UCITS ETF*, **06/12/20180.30%EquityActiveArticle 8
JPM Climate Change Solutions
UCITS ETF**14/06/20220.55%EquityActiveArticle 9
JPM USD Corporate Bond
Research Enhanced Index (ESG)
UCITS ETF*, **06/12/20180.19%Fixed IncomeActiveArticle 8
JPM EUR Corporate Bond
Research Enhanced Index (ESG)
UCITS ETF*, **06/12/20180.19%Fixed IncomeActiveArticle 8
JPM EUR Ultra-Short Income
UCITS ETF**06/06/20180.08%Fixed IncomeActiveArticle 8
JPM GBP Ultra-Short Income
UCITS ETF**06/06/20180.10%Fixed IncomeActiveArticle 8
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of respondents planning to increase their
use of active ETFs to gain exposure to ESG
opportunities over the next five years
16
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